Start paying attention (budget deficits)

Macroeconomics 104

I’m forcing myself to move forward and stop writing about The CARES Act, even though I’ve barely scraped the surface of what is in the 800-page bill and the implications of it’s roll-out (or lack thereof).

If you want to dig deeper, The Freakonomics Podcast episode from Wednesday is stellar: “Is $2 Trillion the Right Medicine for a Sick Economy?“. Stephen Dubner interviews six former White House economic advisors (and one current Senator), asks great questions, and keeps the whole thing under an hour.

I’m well-aware if I just wanted someone to learn the basics of macroeconomics remotely, it would be less work for me (and likely more effective) to direct them to any number of free online resources. The work has already been done; why do it again, with less time, effort, and expertise available? I can’t compete with big-budget productions.

Here are two examples of what I’m referring to.

First, Hillsdale College has a free 10-lecture course entitled “Economics 101: The Principles of Free Market Economics“. If you want a high-quality “crash” course, start there. My classes covered Microeconomics in the first quarter, so if you don’t have a foundation for microeconomic principles, you can watch the first six lectures to catch up.

Second, Khan Academy has a course literally called “Prepare for the 2020 AP Macro Exam“. And, yes, they have tons of other economics resources, too. Go crazy!

The way I see it, the value of what I’m trying to do is teach Macro while weaving it in with day-to-day events. That’s what I can offer. My goal is to filter massive amounts of news and summarize it for you daily while also explaining the economic concepts needed to understand the news. And sure, I hope my own insights and random links and recommendations could add some value on the margins as well.

In my limited conversations with my students over the past few weeks, I have gotten the impression that they have no idea how insane this all is, how completely unprecedented, and how likely it is that the world as we know it is changing forever in front of our eyes. Even if the virus is contained quickly and this lockdown ends soon and we don’t enter a massive economic depression, things are quite simply going to be different.

Start paying attention.

Now for budget deficits!

I suspect many of you expected me to take a harsher stance toward the $2,000,000,000,000 (2T) the government just agreed to spend. After all, it’s about 10% of our gross domestic product, and nearly half the size of the total expenditures planned for the fiscal year 2020 (the planned expenditures were $4,700,000,000,000 (4.7T) , and this is adding well over an additional $2,000,000,000,000 (2T)). Oh, and projected government revenues were $3,700,000,000,000 (3.7T). In other words, if things went according to plan, the United States national debt would have increased by over 1,000,000,000,000 (1T) dollars in 2020! Now, things are not going according to plan on both sides: we’re now spending an additional $2,000,000,000,000 (2T) and government revenues are primarily based on taxing income and payroll, both of which are going to decrease this year.

Numbers this large are nearly impossible to wrap your head around, I know.

This xkcd comic (#980) does an incredible job of showing scale, but you really need to buy it as a poster and spend hours looking at it to fully appreciate everything (both things I have definitely done and highly recommend).

What about this? USDebtClock.org. That’s a real time clock, and breaks everything down into helpful (aka high-blood-pressure inducing) sections. Like, if U.S. citizens were each assigned an equal portion of the current national debt, $23,600,000,000,000 (23.6T), it would come out to $72,000 per person. Just between citizens who pay taxes? $191,000.

This is just information, so where is the lesson? What can you do about it? Should you do something?

A former student (though I can’t claim to have taught her much in my Economics class; she knew most of it coming in) is trying to start a movement toward “Debt Free America”. The first phase of the master plan is “inform”, so you can get a sense of accomplishment by following the instagram page and getting updates there: @DFA_America.

For an organization a phase or two ahead of Cassy’s, you can check out The Peter G. Peterson Foundation. You can learn fun facts there like this one: the U.S. pays over a Billion dollars every day just toward interest on borrowed money! Interest is the fastest-growing portion of the budget.

The idea that government spending can stimulate the economy and it is worth going into debt to do so can be traced back to John Maynard Keynes (pronounced “canes”). He’s easily one of the most influential economists of all time (up there with Adam Smith, the Father of Economics, and Karl Marx, the guy who coined the term “capital” so he could critique “capitalism” in Das Kapital). I suppose you may associate Marx with other things, too. Like Marx, Keynes’ school of thought is known by his name alone: Keynesianism. “Smithism” doesn’t have the same ring to it, unfortunately for Adam.

Keynes basically invented Macroeconomics: looking at economics on a large scale, predicting and measuring the economic impact of various government policies, and developing macroeconomic tools to “steer” the economy. Dating back to the early 1900’s, our government has played a bigger and bigger role in “guiding” the economy, which critics refer to as government “intervention” in the economy. Each new economic crisis has significantly increased the size of government, as well as the amount of intervention. And, so far, there hasn’t been much movement going the other way.

As someone who generally believes in limited government and supports free markets, yes, I am reluctant to see the amount of government intervention increase. But, just like when we covered price gouging, I’m going to try to show you the costs and benefits of both sides, and the tradeoffs involved, and let you decide what the best solution is.

So, how does government “intervene” in the economy?

There are two ways, each with different tools: “fiscal policy” and “monetary policy”.

Fiscal policy is simple in theory: taxation and government spending, i.e., choosing who and what to tax (and at what rate) to create revenue for the government, and then how to spend that money. In practice, that gets complicated real quick.

Monetary policy is basically manipulating the money supply. This tool has increased in power and scope since 1971, when President Nixon officially ended the U.S. dollar being convertible to gold, effectively moving the United States from representative currency to fiat currency (and creating “Nixon Shock“). Money supply manipulation is done through the central bank, known as the Federal Reserve (or just “The Fed”) in the U.S., which was created in 1913. Tools of the Federal Reserve include reserve requirements, open market operations, and the federal funds rate.

How much does the government intervene in the economy? Quite a bit, at this point. I hate to break the news to those of you who are proud of the United States as a bastion of free market capitalism, but the U.S. is currently ranked No. 17 in the 2020 Index of Economic Freedom. That’s outside the top tier, but we still qualify as “mostly free”!

Over the next several weeks I’ll be focusing on each of these aspects of Macroeconomics I just mentioned and explaining it.

A lot is going to happen between now and then. Keep paying attention!